Financial firms serve as the backbone of the economy, providing essential services from lending and investment management to risk management and payment processing. But uncertainty about fiscal and monetary policy has tempered enthusiasm, and over the past six months, the industry has pulled back by 1.3%. This drop was disheartening since the S&P 500 gained 8.4%.
Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. On that note, here is one financials stock poised to generate sustainable market-beating returns and two we’re passing on.
Two Financials Stocks to Sell:
Hercules Capital (HTGC)
Market Cap: $2.86 billion
Named after the mythological hero known for his strength, Hercules Capital (NYSE:HTGC) is a business development company that provides debt financing to venture capital-backed and growth-stage technology and life sciences companies.
Why Does HTGC Give Us Pause?
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Incremental sales over the last two years were much less profitable as its earnings per share fell by 3.9% annually while its revenue grew
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High net-debt-to-EBITDA ratio of 7× increases the risk of forced asset sales or dilutive financing if operational performance weakens
Hercules Capital’s stock price of $15.94 implies a valuation ratio of 8.2x forward P/E. Read our free research report to see why you should think twice about including HTGC in your portfolio, it’s free.
Encore Capital Group (ECPG)
Market Cap: $1.72 billion
Operating in the often misunderstood world of debt collection since 1999, Encore Capital Group (NASDAQ:ECPG) purchases portfolios of defaulted consumer debt at deep discounts and works with individuals to recover these obligations while helping them toward financial recovery.
Why Are We Cautious About ECPG?
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Annual revenue growth of 2.6% over the last five years was below our standards for the financials sector
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Earnings growth over the last five years fell short of the peer group average as its EPS only increased by 3.7% annually
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5× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of shareholder dilution if things turn unexpectedly
At $90.61 per share, Encore Capital Group trades at 7.6x forward P/E. If you’re considering ECPG for your portfolio, see our FREE research report to learn more.
One Financials Stock to Buy:
StoneX (SNEX)
Market Cap: $10.28 billion
Originally known as INTL FCStone until its 2020 rebranding, StoneX Group (NASDAQ:SNEX) provides a global financial services network connecting companies, traders, and investors to markets through clearing, execution, and advisory services.